Collateral management has presented an increasing array of challenges and opportunities over the past decade.
The drivers are a dizzying array of factors – including compliance with new regulatory demands, the application of improved risk management practices, the banking industry's heavy reliance on central bank funding (which is always collateralized) and the need for fund managers to pledge collateral where they leverage their positions. Together, these present a huge demand for high-quality liquid assets (HQLA) to pledge against borrowings and derivative trades.
In recent years, banks have become better at sourcing HQLA. Equally, more supply has come to the market, including central banks buying HQLA as part of their quantitative easing efforts.
Set for launch on February 24 after six months in testing is Collateral Trading, the latest market platform conceived and developed by EquiLend, the global provider of technology to the securities financing, collateral and swaps industries.
Operating in the securities lending space, Collateral Trading is not just another collateral management product in what some see as a crowded marketplace. Rather, says EquiLend, the platform offers a new way to address certain nuances that other products fail to take account of. There are high hopes that it will decrease funding costs while providing a standardized solution to bring collateral supply and demand together to effect trades and bring value in post-trade contract comparison to support agent lender reallocations.
Alvin Oh, Global Product Owner, Trading, EquiLend, elaborates further: "The biggest difference between our NGT platform [Next Generation Trading, a multi-asset-class trading platform for the securities finance marketplace] and Collateral Trading is that the latter allows for trade lifecycle management. Especially for trades with a termed structure, the platform allows users to manage these trades throughout the tenor of the loan whereas NGT is primarily a trade execution platform.
"With the ability to update these trades via returns, recalls and new loans, we effectively allow our clients to automate what today is a cumbersome, manual, bilateral process. Additionally, by using Collateral Trading, counterparties are better connected and liquidity is centralized, bringing about visibility in a market that is currently opaque.
The background as explained by EquiLend is that the collateral management process is bogged down by inefficiencies and manual processes. The sell-side currently lacks a view into the basket trading environment, while the trading process is run down with costly inefficiencies. Trade execution, from posting bids to basket maintenance, is done entirely manually, and not always consistently, or very well.
"We have learned a number of valuable lessons from running our NGT platform, which handles around fifty thousand overnight trades every day," says Paul Lynch, Head of Global Products at EquiLend.
In particular, in the securities lending market, it has become clear that there is a need for HQLA all day, every day, for custodians and lending banks – which are the aggregators, rather than the users, of HQLA.
"This is one of the last non-automated parts of the securities lending industry," explains Lynch. "Existing collateral management solutions are not built to handle extendible trades, or evergreen trades. Collateral Trading emphatically is.
"Evergreen and extendible trades are booked in systems currently. However, problems may arise when a firm has multiple trades on their books with different reset intervals and with different counterparties," says Alvin Oh.
"When we include extendibles and fixed-term trades in the mix, it is challenging for firms to manage on said dates. There may be substantial financial implications when dates are missed, or when trade economics are miscommunicated.
"EquiLend's Collateral Trading platform solves for this by providing timely notifications to counterparties when actions need to be taken. The platform also sends out daily balances to participants, enabling them to manage their exposure more effectively.
"Also, importantly, it serves as a centralized system of record for counterparts to help reconcile any incongruencies they may have in their respective books.
"It is a front-end collateral management platform, something the market has lacked until now," adds Paul Lynch. "It will help deliver greater liquidity, greater efficiency and price discovery, all of which are always good for markets."
To the objective observer, this appears to be a useful add-on to EquiLend's securities finance trading platform and its suite of post-trade services which bring standardization and automation to the market. To those closer to the project, the details take on a new importance.
"Collateral Trading complements our offering of a full front-to-back securities finance solution for market participants, from front office trade executions through to post-trade management," says Alvin Oh.
"With EquiLend Spire integration in the pipeline, clients will be able to manage their entire operation from one central platform. For our clients, this means cost savings, risk mitigation, overall efficiencies and ultimately, access to the tools they need to operate a more profitable business.
Previous efforts in this field have fizzled out due to a lack of standardization and take-up, but EquiLend is adamant that its newest offering will not meet the same fate.
"Our clients benefit from the vast network of user firms that EquiLend has on our existing trading, post-trade, regulatory, clearing and market data services," says Oh. "By building Collateral Trading on top of our existing technology stack, clients can also take advantage of their existing connectivity to EquiLend.
"The vast majority of Collateral Trading user firms are already clients of EquiLend – albeit different desks – which streamlines the onboarding process quite significantly.
"Even though the way these trades are handled among our clients are often bespoke, this platform is designed to introduce a commonality in the way they source or provide liquidity, execute and manage these trades.
"We are standardizing the process, but still allowing for the different nuances in collateral requirements. For example, the platform supports various global indexes, with a robust mechanism to tailor it further.
"EquiLend Collateral Trading provides value in different ways for different firms. For the biggest borrowers and lenders in this space, we offer broadcasting capabilities to allow for a bigger outreach.
"Post-trade processes are onerous in the current paradigm, especially for agent lenders where daily substitutions are commonplace; on Collateral Trading, the platform allows an HQLA provider to quickly make and communicate changes to counterparts.
"For the smaller market participants, it offers unprecedented access to liquidity, opening up new trading opportunities."
Alvin Oh has a ready answer for just about any question an experienced would-be user might care to ask. One such points out that in order to execute a collateral transformation trade and get the greatest value from the transaction, the bank will have to commit to providing collateral for the fixed term. He suggests that as the amount of daily inflow of new, uncommitted collateral is limited, this might limit the usefulness of such a platform for a bank.
"Not necessarily," replies Oh. "The majority of the collateral being used for these transactions is handled via the various tri-party agents. Even though the collateral is being committed, this is constantly being optimized. Clients can benefit from our tri-party collateral management support.
"Similarly, for bilateral collateral delivery models, we support substitutions, where the banks can make changes to the baskets to ensure optimal use of the collateral being pledged."
In summary, EquiLend says this first-of-its-kind trading platform provides a streamlined experience for clients to view balances and negotiate trade baskets across counterparties, all in one place.
By allowing traders to automate a process that is long-overdue for digital overhaul, the platform creates an efficient, centralized way to manage trade structures and, in turn, ensures transparency and consistent pricing across the industry. It covers market discovery, as well as trade execution and post-trade elements.
A rigorous testing process by EquiLend involved more than 30 European counterparties, more than 20 from the US, and a small number from Asia Pacific, taking part in live interactions.
It expects transaction volume to ramp up in the first year to around US$20 billion, or 3 percent to 5 percent of the current total of $400 billion to $500 billion being carried out daily.
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Collateral management has presented an increasing array of challenges and opportunities over the past decade.
The drivers are a dizzying array of factors – including compliance with new regulatory demands, the application of improved risk management practices, the banking industry's heavy reliance on central bank funding (which is always collateralized) and the need for fund managers to pledge collateral where they leverage their positions. Together, these present a huge demand for high-quality liquid assets (HQLA) to pledge against borrowings and derivative trades.
In recent years, banks have become better at sourcing HQLA. Equally, more supply has come to the market, including central banks buying HQLA as part of their quantitative easing efforts.
Set for launch on February 24 after six months in testing is Collateral Trading, the latest market platform conceived and developed by EquiLend, the global provider of technology to the securities financing, collateral and swaps industries.
Operating in the securities lending space, Collateral Trading is not just another collateral management product in what some see as a crowded marketplace. Rather, says EquiLend, the platform offers a new way to address certain nuances that other products fail to take account of. There are high hopes that it will decrease funding costs while providing a standardized solution to bring collateral supply and demand together to effect trades and bring value in post-trade contract comparison to support agent lender reallocations.
Alvin Oh, Global Product Owner, Trading, EquiLend, elaborates further: "The biggest difference between our NGT platform [Next Generation Trading, a multi-asset-class trading platform for the securities finance marketplace] and Collateral Trading is that the latter allows for trade lifecycle management. Especially for trades with a termed structure, the platform allows users to manage these trades throughout the tenor of the loan whereas NGT is primarily a trade execution platform.
"With the ability to update these trades via returns, recalls and new loans, we effectively allow our clients to automate what today is a cumbersome, manual, bilateral process. Additionally, by using Collateral Trading, counterparties are better connected and liquidity is centralized, bringing about visibility in a market that is currently opaque.
The background as explained by EquiLend is that the collateral management process is bogged down by inefficiencies and manual processes. The sell-side currently lacks a view into the basket trading environment, while the trading process is run down with costly inefficiencies. Trade execution, from posting bids to basket maintenance, is done entirely manually, and not always consistently, or very well.
"We have learned a number of valuable lessons from running our NGT platform, which handles around fifty thousand overnight trades every day," says Paul Lynch, Head of Global Products at EquiLend.
In particular, in the securities lending market, it has become clear that there is a need for HQLA all day, every day, for custodians and lending banks – which are the aggregators, rather than the users, of HQLA.
"This is one of the last non-automated parts of the securities lending industry," explains Lynch. "Existing collateral management solutions are not built to handle extendible trades, or evergreen trades. Collateral Trading emphatically is.
"Evergreen and extendible trades are booked in systems currently. However, problems may arise when a firm has multiple trades on their books with different reset intervals and with different counterparties," says Alvin Oh.
"When we include extendibles and fixed-term trades in the mix, it is challenging for firms to manage on said dates. There may be substantial financial implications when dates are missed, or when trade economics are miscommunicated.
"EquiLend's Collateral Trading platform solves for this by providing timely notifications to counterparties when actions need to be taken. The platform also sends out daily balances to participants, enabling them to manage their exposure more effectively.
"Also, importantly, it serves as a centralized system of record for counterparts to help reconcile any incongruencies they may have in their respective books.
"It is a front-end collateral management platform, something the market has lacked until now," adds Paul Lynch. "It will help deliver greater liquidity, greater efficiency and price discovery, all of which are always good for markets."
To the objective observer, this appears to be a useful add-on to EquiLend's securities finance trading platform and its suite of post-trade services which bring standardization and automation to the market. To those closer to the project, the details take on a new importance.
"Collateral Trading complements our offering of a full front-to-back securities finance solution for market participants, from front office trade executions through to post-trade management," says Alvin Oh.
"With EquiLend Spire integration in the pipeline, clients will be able to manage their entire operation from one central platform. For our clients, this means cost savings, risk mitigation, overall efficiencies and ultimately, access to the tools they need to operate a more profitable business.
Previous efforts in this field have fizzled out due to a lack of standardization and take-up, but EquiLend is adamant that its newest offering will not meet the same fate.
"Our clients benefit from the vast network of user firms that EquiLend has on our existing trading, post-trade, regulatory, clearing and market data services," says Oh. "By building Collateral Trading on top of our existing technology stack, clients can also take advantage of their existing connectivity to EquiLend.
"The vast majority of Collateral Trading user firms are already clients of EquiLend – albeit different desks – which streamlines the onboarding process quite significantly.
"Even though the way these trades are handled among our clients are often bespoke, this platform is designed to introduce a commonality in the way they source or provide liquidity, execute and manage these trades.
"We are standardizing the process, but still allowing for the different nuances in collateral requirements. For example, the platform supports various global indexes, with a robust mechanism to tailor it further.
"EquiLend Collateral Trading provides value in different ways for different firms. For the biggest borrowers and lenders in this space, we offer broadcasting capabilities to allow for a bigger outreach.
"Post-trade processes are onerous in the current paradigm, especially for agent lenders where daily substitutions are commonplace; on Collateral Trading, the platform allows an HQLA provider to quickly make and communicate changes to counterparts.
"For the smaller market participants, it offers unprecedented access to liquidity, opening up new trading opportunities."
Alvin Oh has a ready answer for just about any question an experienced would-be user might care to ask. One such points out that in order to execute a collateral transformation trade and get the greatest value from the transaction, the bank will have to commit to providing collateral for the fixed term. He suggests that as the amount of daily inflow of new, uncommitted collateral is limited, this might limit the usefulness of such a platform for a bank.
"Not necessarily," replies Oh. "The majority of the collateral being used for these transactions is handled via the various tri-party agents. Even though the collateral is being committed, this is constantly being optimized. Clients can benefit from our tri-party collateral management support.
"Similarly, for bilateral collateral delivery models, we support substitutions, where the banks can make changes to the baskets to ensure optimal use of the collateral being pledged."
In summary, EquiLend says this first-of-its-kind trading platform provides a streamlined experience for clients to view balances and negotiate trade baskets across counterparties, all in one place.
By allowing traders to automate a process that is long-overdue for digital overhaul, the platform creates an efficient, centralized way to manage trade structures and, in turn, ensures transparency and consistent pricing across the industry. It covers market discovery, as well as trade execution and post-trade elements.
A rigorous testing process by EquiLend involved more than 30 European counterparties, more than 20 from the US, and a small number from Asia Pacific, taking part in live interactions.
It expects transaction volume to ramp up in the first year to around US$20 billion, or 3 percent to 5 percent of the current total of $400 billion to $500 billion being carried out daily.
